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Economists Offer 2 Takes On Obama Stimulus Plan

In his inaugural address, President Barack Obama talked about the biggest problem facing his administration: the recession.

"The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth," he said. "We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together."

Economists Paul Krugman and Russell Roberts have very different opinions on what shape Obama's proposed $800 billion-plus stimulus package should take.

Spending Vs. Tax Cuts

"This is a situation where you want to pull out all the stops," Krugman, a Nobel laureate and New York Times columnist, tells NPR's Robert Siegel. "You look for as many public investments as possible, including some that will take a while to get going, because all indications are that we're looking for an extended slump."

Krugman is of the opinion that the proposed $800 billion-plus stimulus package is not large enough to have a meaningful impact. He says the administration should spend $1 trillion or more over two years.

Not so, says Roberts, professor of economics at George Mason University. He argues that public spending is unlikely to have the desired effect.

"The money is going to be borrowed, which encourages people to be more worried about the future and their future taxes down the road, and I don't think it's going to be particularly well spent," Roberts tells Siegel in a separate interview. "So I see a hurried project, financed by borrowing on stuff that's probably going to be wasteful."

Roberts instead favors a cut in tax rates.

The Obama plan calls for some sort of a combination of public spending and tax cuts. Krugman says he understands that tax cuts are needed in the mix, but argues they are not always effective.

"What we know is that a substantial part of tax cuts will be saved rather than spent," Krugman says.

Roberts says, however, that people will save the tax cuts only because they aren't really tax cuts. He says Obama's plan sounds much like the $160 billion tax rebates offered last year.

"That's just giving everybody a fixed amount of money. What we want to do is change incentives," Roberts says. "So if we're going to have tax cuts, it'll be nice to have tax cuts that change tax rates. In addition, it would be nice to have tax cuts that had lower spending, not higher spending."

Unemployment

Both economists agree that the measure of success of any stimulus package is the unemployment number.

"I want to see the unemployment rate stay safely below 10 percent, which is by no means a foregone conclusion," Krugman says. "And I want to see it coming down notably in the next year."

Roberts says that while dealing with the effects of the recession, we might have to deal with the reality that the government cannot stimulate the economy.

"We seem to assume that it's just a question of finding the right stimulus, but it is very possible that the lack of confidence that people have in the future right now is not easily fixed either by spending or by tax cuts," he says. "Some businesses are going to have to fail. Some people are going to have to have some problems with their debts. Wages are going to have to change.